Unfashionable style

Study finds flaws in 'value' and 'growth' investing

By

ThomasKostigen

LOS ANGELES (CBS.MW) - Many professional and individual investors alike proudly proclaim their preferred style - be it growth or value, large-cap or small - as if it were the defining element of their financial character.

Yet deciding which stock or mutual fund to own based on such investment styles is increasingly becoming a flawed approach, according to Barra Strategic Consulting.

In a report titled "Style is Dead. Long Live Style," the Darien, Conn.-based consulting group argues that style classifications designed by investment firms in the mid 1980s are out-of-date and no longer reflect the movements of these securities in today's markets.

In the main, there are three overall investment styles -- value, growth and core stocks. Yet securities fall into myriad classifications, not just three, Barra says.

The number of securities has proliferated across all asset class, making it ever more difficult to categorize stocks, bonds, and mutual funds in such a simplistic manner. Moreover, "the ubiquitous growth-core-value style boxes and the popular style benchmarks are disappointing investors," Barra says.

Charles Widger, president of Brinker Capital, an investment firm in King of Prussia, Pa., says technology is available - and should be used - to decipher the right investment choices. Broad measures leave room for faulty decisions, he says. In fact, Widger has designed a set of investment tools, ProGen, which design in 20 seconds an asset allocation model that weeds through asset classes and investment styles.

To be sure, growth, value and core classifications can affect expected return. And proper financial planning and sound portfolio management require such return considerations. Chicago-based Ibbotson Associates has long found asset allocation accounts for 95 percent of investment return; it's not the individual stock purchase that counts.

Yet the Russell 1000 Growth Index has seen its sector concentration fluctuate greatly over the last two years. "Individuals who after the fact recognized that they were over-exposed to technology stocks now understand the flaws of style boxes," the Barra report says.

Sure, it's a growth stock, but what type of growth stock? Likewise, "the financial planner who must explain why certain 'value' managers are performing well in the current period while others are not, has learned that not all value managers represent the same flavor of value," the report says.

In case studies, Barra compared "value" portfolios and analyzed their returns. One case shows an extra 2.5 percent return credited to a portfolio that emphasized good, value stocks, but lost 90 basis points because those stocks fell out of favor -- by definition of their "style."

"It's really hard to put all stocks and mutual funds into neat style boxes especially when we have such market extremes," says Geoff Bobroff, a mutual-fund and investment analyst in Greenwich, Rhode Island.

Bobroff says, however, that managers and investors are almost forced to choose stocks that may be inappropriate for individual portfolios.

"If the box says you need to have this much in growth, then you have to choose by that," he says.

In larger portfolios, investment managers have to adhere to strict policies and keep exact percentages in growth, value, core, as well as alternative investments.

Hence, Barra suggests a multi-factor risk analysis that looks at mutual funds and securities and assigns them a "footprint." This footprint shows to which general category these investment products should be assigned, but doesn't box them in a definition.

"The impact of style must be properly considered and disentangled from total performance," Barra says.

That would mean indexes, benchmarks and the way in which stocks, bonds and mutual funds are classified would have to change.

But that might be okay.

"Investors need to trust and rely more on technology," Widger says.

Sophisticated investment tools and technology can aggregate more specific recommendations for portfolios and financial plans.

These recommendations can be based on how an investment product behaves in various market conditions, not what type it is and how it should behave.

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